Rising prices of gas, food and rent inflation Reaching a new four-decade peak in June is likely to put further pressure on households and seal the case for another major interest rate hike by the Federal Reserve, with higher borrowing costs to follow.
Consumer prices rose 9.1 percent from a year ago, the government said on Wednesday, the biggest 12-month increase since 1981, and up from a jump of 8.6 percent in May. On a monthly basis, prices rose 1.3 percent from May to June, another significant increase followed by a one percent increase in prices from April to May.
Ongoing price increases underscore the brutal impact of inflation on many households, especially with the cost of necessities, rising much faster than the average income. Low-income and black and Hispanic Americans have been hit particularly hard, as a disproportionate portion of their income goes toward essentials like housing, transportation, and food.
Some economists have expressed hope that inflation may reach or be close to a short-term peak. For example, gas prices fell from US$5 a gallon in mid-June to an average of US$4.66 nationwide as of Tuesday – still far higher than a year ago but a drop that slows inflation. July and possibly August might help.
In addition, shipping costs and commodity prices have started to decline. Wage growth has slowed. And polls show that over the long term, Americans’ expectations for inflation have plummeted — a trend that often points to more moderate price increases over time.
Yet for now, continued rise in inflation has caused a sharp drop in consumer confidence in the economy, slashed President Joe Biden’s approval ratings and posed a major political threat to Democrats in November’s congressional elections. Forty percent of adults in an AP-NORC poll in June said they thought tackling inflation should be a top government priority this year, up from just 14 percent who said so in December.
In the immediate aftermath of the pandemic recession of 2020, as Americans focused their spending on household items such as furniture, equipment and exercise equipment, supply chains were overwhelmed and prices of physical goods soared. But as consumer spending has gradually shifted away from goods and toward services such as holiday travel, restaurant meals, movies, concerts and sporting events, services have seen some of the highest price increases.
Housing, in particular, has been confiscated by some of the highest inflation rates in the economy, causing hardship to many. A lack of homes for sale has caused home prices to skyrocket, as have mortgage rates.
For many people’s homes at an out-of-market price and instead of rent, demand for apartments has sent rental rates beyond affordable levels. The national median home price rose 14.8 percent to US$407,600 in May from a year earlier. According to the National Association of Realtors, this is the highest level ever recorded as of 1999.
The persistence of high inflation has troubled Chair Jerome Powell and other Fed officials, who engaged in the sharpest series of rate hikes since the late 1980s to try to slow price hikes. The central bank is expected to hike its key short-term rate by three-quarters later this month, as it did last month, potentially to follow more major rate hikes.
Powell has stressed that the central bank wants to see “compelling evidence” that inflation is slowing before it rolls back its rate hikes. Powell said at a news conference last month that such evidence would require a “series of declines in monthly inflation readings.”
Many economists worry that it will tighten credit too aggressively because of the Fed’s campaign to reduce inflation, while the economy is slowing by some measures. Too high borrowing costs could potentially lead to a recession until next year.
Consumers have begun to pull back on spending, home sales are falling as mortgage rates rise and factory output slipped in May. Yet consistently strong job growth points to an economy that is still expanding, with little sign of an impending recession.
While inflation is likely to slow later this year, it is not clear by how much. Oil prices fell to around US$96 a barrel on Tuesday. And other commodities, including metals such as copper, have become less expensive, mostly due to recession fears in both the United States and Europe.
With fewer ships stuck at the Port of Los Angeles and Long Beach, shipping costs have fallen for America’s largest, international freighter. According to Omair Sharif, founder of Inflation Insights, wholesale gas prices have fallen to around US$3.40 per gallon, suggesting that retail prices may drop to US$4.20 by August.
And wholesale used car prices are also falling, which indicates a fall in used car prices in the coming months.
Yet the price of many items is still rising, especially apartment rentals. According to real estate brokerage Redfin, the average cost of new leases has risen 14 per cent over the past year, averaging US$2,016 a month.
Rents, as measured by the government’s inflation index, have risen more slowly because they include all rents, including existing leases. But economists expect the government’s inflation rate to rise further in the coming months due to the rising cost of new leases.
Inflation has also increased abroad. It rose to 9.1 percent in the United Kingdom in May, the highest level in four decades, driven mostly by higher gas and food prices. Annual inflation in 19 eurozone countries reached 8.6 percent in June, up from 8.1 percent recorded in May. Inflation is now at its highest level since record-keeping began for the euro in 1997.
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